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While small-cap stocks, such as Baytex Energy Corp. (TSE:BTE) with its market cap of CA$1.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into BTE here.
How does BTE’s operating cash flow stack up against its debt?
Over the past year, BTE has ramped up its debt from CA$1.7b to CA$2.0b , which includes long-term debt. With this rise in debt, BTE currently has CA$45m remaining in cash and short-term investments , ready to deploy into the business. Moreover, BTE has produced CA$413m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 21%, indicating that BTE’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In BTE’s case, it is able to generate 0.21x cash from its debt capital.
Does BTE’s liquid assets cover its short-term commitments?
Looking at BTE’s CA$418m in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of CA$229m, with a current ratio of 0.55x.
Can BTE service its debt comfortably?
With a debt-to-equity ratio of 64%, BTE can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since BTE is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
BTE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how BTE has been performing in the past. You should continue to research Baytex Energy to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BTE’s future growth? Take a look at our free research report of analyst consensus for BTE’s outlook.
- Valuation: What is BTE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BTE is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.